1. Signs of growth are an illusion. “The economic growth that we’re seeing isn’t really economic growth. It’s just spending,” Jeffrey Gundlach, DoubleLine Capital CEO and chief investment officer, said on a webcast Tuesday. “A lot of it manifests itself in trade deficits growing and in consumer consumption numbers,” he said, adding that “many of the goods that are being consumed, of course, are coming in from overseas so our real production hasn’t increased much.”
The U.S. nominal GDP is “now higher than it was pre-pandemic … by a couple of trillion dollars,” he noted. Although “that sounds like an accomplishment,” it is the result of the government’s more than $5 trillion in spending, although “not all that money has been deployed” yet, he said.
2. The Fed will likely start tapering QE. The Federal Reserve “has been doing quantitative easing to the tune of $120 billion per month on” Treasury and mortgage-backed securities and it has “been on auto pilot for the past 60 weeks,” Gundlach said.
There is a debate on whether the Fed will continue its QE pace and “the current thinking, that I agree with, is that they’re going to be talking about this” over the next 2-3 months, he said. “It’s very likely that they’ll start tapering [but] we don’t have any clarity on how much they’ll reduce the bond purchases,” he added.
However, the Fed has “made it clear in their statements that they’ll do it pro rata,” so if they’re spending $10 billion now, they’ll drop it by $5 billion, he said.
3. The federal funds rate will remain at zero for the foreseeable future. Gundlach predicted the Fed won’t entirely stop its bond purchases. “The thinking is that the fed funds rate is going to stay at zero until such time as the Fed’s not buying any Treasury bonds or mortgage-backed securities,” he said.
The “total” elimination of QE “will take some time, so the betting is that the fed funds rate is going to stay at zero for at least a year and the betting is even two years,” he added.
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4. There are fewer Americans employed than during the pre-pandemic peak. The number of U.S. nonfarm employees “hasn’t come close to a rebound,” Gundlach said, pointing to data showing there are now 5.3 million fewer Americans employed than there were during the pre-pandemic peak.
That is why we keep hearing the narrative "all across the United States that … businesses are having a hard time getting workers,” he said.
“This remains a wound to the economy and it shows that, in a certain sense, the economy has not really recovered,” he said. Although consumption and nominal GDP have recovered thanks to help from the stimulus spending, it “hasn’t yet translated into jobs,” he added.
Now that supplemental U.S. employment benefits recently ended for many unemployed Americans, we will see if that “motivates workers to come back” to the job market, he said.
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5. A wave of foreclosures will hit the U.S. economy. “Foreclosures are at a multi-decade low because of the moratoria” on them during the pandemic, Gundlach said. At the same time, “delinquencies are really, really high,” he said.
“One of the consequences of this, of course, is that should the moratoria be removed, one would expect to see a pretty large increase in foreclosures,” he noted.
“That’s going to have economic ramifications for sure,” he said, predicting rent inflation and “other economic dislocations because this divergence is extraordinary and portends a very, I would say, rocky transition in the economy.”
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6. Consumer confidence remains high, but expectations for the future remain low. Although consumer confidence has slipped a little in recent months, it “remains very, very high,” Gundlach said. “But the expectations [for] the future [have] not really improved. It’s stayed very low” and was so even before the pandemic, he noted.
Such trends tend to foreshadow recessionary periods, he pointed out. “While it puts us on notice that a recession could be more likely today than it was, say, a year ago,” he said consumers would first “have to start feeling worse about the current situation.”
7. Gundlach remains neutral on the U.S. dollar — for now. “We’ve been neutral to bullish on the U.S. dollar for quite some time at DoubleLine — probably since six or seven months ago,” Gundlach said.
“But we’re looking for the dollar ultimately — and this might be a 2022 story — to head lower, and that’s going to be the time when investors should move to emerging market equities,” he said.
8. Inflation will remain a concern. “Right now, there’s not a great reason to believe” that inflation is “going to go back down” to the 2% that the Fed is targeting, Gundlach said, adding: “We don’t even see” it going to 3% “anytime soon.”
“For the year, 2021 is a coin flip whether or not the headline is CPI is above or below 5%,” he said. “If it’s below 5, it’s going to be in the high 4s,” he predicted.
“I don’t think the history book will say inflation was transitory,” he added. “Right now, I think, the Fed seems to want to believe transitory means maybe nine months. And we’re getting close to the end of that nine months.”
9. Commodities continue to perform well, except for gold. “Commodities have been very strong,” Gundlach said, noting he was bullish on them, like many others, when the pandemic started. He is currently neutral on them but “we will be bullish on commodities the minute that the dollar starts falling,” he said.
Gold, however, is the “one commodity that has gone down for the past year and a half,” and Gundlach remains neutral on it also, he said.
Although DoubleLine has been “relatively positive on European equities,” it hasn’t been positive on emerging market equities, he also said.
10. TIPS are looking too expensive now. Gold “looks a little cheap” compared to Treasury inflation-protected securities, Gundlach said, noting TIPS look somewhat expensive around current levels.